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How Can Business Loans Be Used To Cover Payroll And Funds For Inventory? – 2020 Guide

Setting up a business from scratch or leveling up an established business is indeed a challenge in the present age as improvement calls for capital. If you do not have enough money to do it on your own you might want to consider taking a business loan.

Now before you scroll down for the details immediately, let’s understand a few essentials of taking a business loan. First, you must figure out how you will use the money, and second, how do you plan to pay it back. If you do not build a strong strategy, you will more likely drown in debts as well as your business will experience added difficulties.

Though there are many ways to use a business loan such as for purchasing equipment, covering day to day expenses, marketing, etc. However, there are two most suitable uses of business loans i.e. ‘covering payroll’ and ‘purchasing inventory’. Here we will be discussing these two uses in detail.

Funds for Inventory:

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You plan to run a boutique, so you buy a place and start working on it. You intend to attract customers so you work on the store’s entrance so as to make it unique but what about when customers walk into your boutique? What about those empty shelves or having a limited number of products that will surely drive the customers away?

With business loans, you can use a good sum of money to keep your product or service-based business smoothly.  You have all the working capital you need in your hands to maintain funds for your inventory.

So how does Inventory Financing Work?

These loans fall under debt-based financing. It simply means that you get money from a lender by forming an agreement that you will be repaying the money over time with the interest. This is different from what we call equity financing where you have to exchange a share in ownership so as to receive the funding.

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With an inventory loan, you are given a lump sum amount or a credit line that can be used to buy inventory. Usually, it is difficult to finance the total cost of inventory, but you can expect at least 50% finance if you get approved.

Hence, business loans for inventory are designed to be a financing solution that is short-term. It allows you to have the money required to purchase inventory and as you keep selling it, you can repay it over time.

Covering Payroll:

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Other than inventory, payroll counts as one of the major expenses for most businesses. The bad news is that it does not align with the cash flow all the time if you are paying your workers on a bi-weekly basis but your customers who only pay on a monthly basis. Failing to pay your staff can because you trouble. You can have negative reviews from your customers about how bad is your customer service etc.

If you take a risk and spend the amount of money that was supposed to be given to the vendors, to pay your workers, you will end up in a really bad situation. And it will not only increase your debt but will also disturb the whole cycle of your business process.

This is the reason why small business owners look for business funding to help them cover payroll expenses. It is always better to maintain a good working relationship with your vendors and minimize the chance of delaying your shipments or facing any other vendor-related issues.

Business owners also want to access their form of funding multiple times. Once you have repaid your loan, you cannot borrow from that same loan again. So in order to gain more capital, you will be required to fill out another application for a loan.

It is a wise option to think of a plan that can work for a long term basis and apply for a loan that will be enough to cover your current payrolls as well as future ones. Repaying a loan must not disturb your business operations so you must align with your cash flows. To simply put, business loan for covering payrolls must meet the following criteria:

  • Flexible funding.
  • Renewable funding.
  • The repayment that suits your cash flow.

These goals can be acquired through different sorts of funding options. You should compare them with one another and choose those that match your business requirements.

Conclusion:

You can take all the time you have to weigh your options and consider their outcomes when taking a business loan. It is best to have a chat with your lender so that he would explain to you the pros and cons and assist you in evaluating your requirements and recommend accordingly.

About Iva Voss

Iva Voss

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